06/17/2013

If Death Occurs, What Becomes of the RMD on an Inherited IRA?

If the IRA owner died before their RBD,
there is no year of death RMD that you need to take. However, if the IRA owner
died after their RBD, there may be an RMD that you as their beneficiary have to
take that year.

When a loved one is no longer
with us, do all of their financial and legal affairs cease? For the most part –
yes. But when the loved one is over the age of 70 ½, there could be an exception in the form of their final RMD on
their IRA.

Many surviving designated
beneficiaries of a decedent’s IRA do not realize that Required Minimum
Distributions (RMDs) have to be taken annually and up to the end, even if the
owner died earlier in that year. In fact, the year of death IRA distribution is
a requirement that is easy to miss.

Essentially, the RMD is required
because there is an attending tax burden involved. As you likely are aware, any
individual over the age of 70 ½ must take RMD from their IRA. When it comes to
the year of death for such an individual, their designated beneficiary of the
IRA must take the RMD even before inheriting the IRA itself.

OK; simple enough. The trouble
is that it is difficult to track whether the decedent had already taken their
full RMD in the year of their death. For example, were they on a monthly
installment plan? Were they waiting until the last moment? Did they
miscalculate?

So, what is the penalty for
failing to take the full RMD? Would you believe a whopping 50% of the
shortfall?!

If you are the IRA owner, then
you can see how accurate and communicated recordkeeping can help your loved
ones (i.e., your designated beneficiaries) avoid an unpleasant treasure hunt to
determine the post-mortem status of your RMD.